The Judgment of the Court was delivered by

Ajit Kumar Sengupta, J.:— The assessee is a limited company engaged in the business of manufacture and sale of aluminium foils. The assessment year involved is 1980–81. The assessee claimed deduction of the following three items of excise duty while computing the business income:

(Rs.) (1) Demand notice dated August 3, 1979 2,57,364 (2) Demand notice dated September 20, 1979 56,84,425 (3) Estimated liability not covered by demand notice 25,30,000

2. The case of the assessee before the Income-tax Officer was that it was not liable to excise duty. It moved the High Court to pass an interim order restraining the central excise authorities from realising the duty. By a notification dated December 13, 1980, the Government exempted aluminium foils from payment of duty if they are made for export. This exemption became effective from January 5, 1981, i.e, subsequent to the previous year under consideration. The Income-tax Officer disallowed the claim of the assessee on the ground that the excise duty related to a period prior to the previous year under consideration and the same was not allowable under the mercantile system of accounting. On appeal, the Commissioner of Income-tax (Appeals) found that the sum of Rs. 2,57,304 was relatable to the clearance of goods made during the year 1979, which is the relevant previous year now under consideration. Hence, he held that the statutory liability to pay the duty arose on the clearance of the goods notwithstanding the fact that the assessee was disputing its liability. Relying on the decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC), he directed the allowance of the sum of Rs. 2,57,304 as a deduction. However, so far as the other two items were concerned, he did not find any case in favour of the assessee as those demands related to a period prior to the previous year under consideration. Hence, he disallowed the other two amounts.

3. The assessee came in appeal to the Tribunal and contended that the other two items should also have been allowed. On the other hand, the Revenue supported the disallowance of those two items. The Department also came up in appeal contending that the allowance of Rs. 2,57,304 by the Commissioner of Income-tax (Appeals) was erroneous and that the same should be reversed. The Tribunal considered the contentions of both the parties as well as the facts on record. It found that, in the case of Kedarnath Jute Mfg. Co. Ltd., [1971] 82 ITR 363 (SC), it has been held that the statutory liability to pay a duty arises on the happening of an event attracting the levy of duty. There was no dispute about the fact that the clearance in respect of which the sum of Rs. 2,57,304 was levied as duty was made during the previous year under consideration. It is the clearance of the goods which attracts statutory excise duty. Hence, the Tribunal held that the sum of Rs. 2,57,304 was rightly allowed by the Commissioner of Income-tax (Appeals) as a deduction. However, regarding the other two items, the Tribunal found no nexus between the expenses and the previous year under consideration. The Tribunal observed that the clearance of the manufactured products occurred long before the previous year under consideration. Hence, relying on the decision in the case of Kedarnath Jute Mfg. Co. Ltd., [1971] 82 ITR 363 (SC), the Tribunal upheld both the allowance of Rs. 2,57,304 and the disallowance of Rs. 82,14,425 made by the Commissioner of Income-tax (Appeals).

4. The Tribunal having rejected the reference application under section 256(1), the following questions were referred pursuant to the direction of this court under section 256(2) of the Act:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the statutory liability to pay excise duty arises at the time of clearance of the goods?

(2) Whether the Tribunal should have held that the liability to excise duty is attracted at the point of production or manufacture of the goods and, accordingly, the liability for Rs. 2,57,304 being referable to earlier years was not admissible as a deduction in the assessment year 1980–81?

(3) Without any prejudice to the above questions of law, whether, in view of the High Court's stay order, there was any statutory liability to pay excise duty during the previous year relevant to the assessment year 1980–81 in respect of the amount of Rs. 2,57,304 and, if there was no such liability, whether the Tribunal was justified in allowing deduction of Rs. 2,57,304 in assessment year 1980–81?”

5. Having heard the advocates for the parties, we are of the view that the question should be reframed as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the liability in respect of the excise duty amounting to Rs. 2,57,304 is allowable as a deduction in the assessment year 1980–81?

6. At the hearing before us, Mr. Moitra, learned counsel for the Revenue, contended that no part of the liability claimed accrued during the relevant previous year as, according to him, the duties of excise are imposed on production or manufacture of goods and the taxable event occurs on the production or manufacture of goods. It is his contention that the liability to pay excise duty does not depend on the clearance of goods.

7. He has submitted that, in this case, admittedly, the goods were not manufactured during the relevant previous year and the question of levying the excise duty during the assessment year did not arise. We are, however, unable to accept the contention of learned counsel on the facts and in the circumstances of the case.

8. The Supreme Court in Ujagar Prints v. Union of India, [1989] 179 ITR 317, observed as follows (at page 348):

“Duties of excise are imposed on the production or manufacture of goods and are levied upon the manufacturer or the producer in respect of the commodity taxed. The question whether the producer or the manufacturer is or is not the owner of the goods is not determinative of the liability. The essential and conceptual nature of the tax is to be kept clearly distinguished from both the extent of the power to impose and the stage at which the tax is imposed. Though the levy is on the production or manufacture of the goods the imposition of the duty could be at the stage which the law considers most convenient to impose as long as a rational relationship with the nature of the tax is maintained.”

9. It is no doubt true that the duty is on the manufacture or production of goods; but, as a matter of fact, in accordance with the rules, the duty is payable at the time when the goods are cleared from the factory premises. In this case, as we have already observed, the contention of the assessee was that it was not liable to pay any excise duty on aluminium foils. The assessee made a representation to the authorities for exemption, but without any success. The assessee, thereafter, moved a writ petition on May 6, 1980, against the show cause-cum-demand notice dated August 3, 1979, issued during the relevant previous year. The High Court passed an interim order restraining the central excise authorities from levying duty on aluminium foils. Thereafter, the Central Government issued a notification on December 13, 1980, exempting aluminium foils from the payment of excise duty for export under bond. This notification was made effective from January 5, 1981. Accordingly, the goods manu-factured and cleared prior to the said notification were liable to duty. In this case, the show cause-cum-demand notice was issued during the relevant previous year. The goods were also cleared during the relevant previous year and, accordingly, the assessee is entitled to the benefit of deduction of the liability covered by the said show cause-cum-demand notice in respect of the goods cleared during the relevant previous year. It is true that the duty is disputed but, as we have observed, in view of the subsequent notification, it became crystal clear that the Government did not allow exemption on the manufacture of aluminium foils prior to January 5, 1981.

10. Our attention has been drawn also to a decision of this court in CIT v. Century Erika Ltd., [1981] 130 ITR 267. In that case, the assessee-com-pany was engaged in the manufacture of nylon yarn. In 1969, the Assis-tant Collector of Central Excise informed it that it was liable to pay excise duty on the producton of polymer chips. The assessee disputed its liability on the ground that polymer chips were utilised by the assessee itself in the manufacture of nylon yarn. The Assistant Collector held that the assessee was liable to pay excise duty. However, no demand notice had been issued for the excise duty. The assessee made a provision for the liability of excise duty for the assessment year 1971–72 in the sum of Rs. 14,96,000 and of Rs. 17,00,000 for the assessment year 1972–73 in its accounts which were maintained on the mercantile system and claimed them as business expenditure. It was held that the provision for excise duty of Rs. 15,26,000 and Rs. 17,00,000 was allowable as deduction for the assessment years 1971–72 and 1972–73.

11. In Commissioner Of Income-Tax, West Bengal-X v. Orient Supply Syndicate., [1982] 134 ITR 12 (Cal), the assessee-firm which followed the mercantile system of accounting claimed a deduction of Rs. 29,008 for the assessment year 1964–65 as provident fund contribution made by the assessee under the Employees' Provident Funds Act, 1952. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim on the ground that the contribution related to earlier years. On further appeal, the Tribunal found that though it was a statutory liability under the Employees' Provident Funds Act to make contributions, it was never enforced under the Act in the earlier years, and it was only in the year under appeal that the Regional Provident Fund Commissioner called upon the assessee to make statutory contri-butions for the entire period from November, 1957, and that, since the demand for the statutory contribution was made by the authorities for the first time during the year under appeal, the entire amount paid in that year was an allowable deduction. A letter addressed to the assessee by the Regional Provident Fund Commissioner indicated that a decision was pending for compliance with the statute for the period November 1, 1957, to December 31, 1960. On a reference, a Division Bench of this court held that, in part, the statutory liability, admittedly, accrued in the year in question and in part became real and enforceable in the year in question though referable to the earlier years. The sum of Rs. 29,008 was, therefore, allowable, as a deduction for the assessment year 1964–65.

12. Our attention has also been drawn to a decision of a Division Bench of this court in Shalimar Chemical Works Private Ltd. v. Commissioner Of Income-Tax, [1987] 167 ITR 13. In that case, the assessee-company which came within the purview of the substituted section 2(9) of the Employees' State Insurance Act, 1948, became liable to contribute for insurance to the ESI Corporation but did not make any contribution as required by the substituted section nor did it initiate any proceedings challenging the substituted section 2(9). The ESI authorities informed the assessee in January, 1974, about the decisions of the courts and also demanded contributions as per the substituted section. On a further demand being made by the authorities on February 20, 1974, the assessee agreed to pay the contribution as demanded. For the assessment year 1975–76, the assessee claimed deduction of Rs. 45,191 as expenditure incurred on account of contribution to the ESI Corporation for the period from January 28, 1968, to June 30, 1973. The Income-tax Officer rejected the claim for deduction on the ground that the same was not a liability for the year under consideration. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer on the ground that as the assessee followed the mercantile system of accounting, the liability accruing under a statute was allowable as a deduction in the year when the liability accrued and since the liability accrued under the statute itself as amended and the assessee did not make any provision for such liability in the earlier years, the same was not an allowable deduction for the assessment year 1975–76. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference, this court held that, though the statutory liability was created by Act No. 44 of 1966, the liability became real and enforceable in the relevant subsequent year though the demand was referable to the earlier years. The position was clarified by the High Courts upholding the validity of the extension of the statute after which the assessee was called upon to discharge its liability. From a commercial point of view, the assessee was at that stage entitled to treat the demand of the ESI authorities as final and enforceable and the liability as having accrued on the said demand at that stage. Therefore, the sum of Rs. 45,191 was allowable as a deduction for the assessment year 1975–76.

13. It is, therefore, not correct to contend that since the goods were not manufactured during the relevant previous year, the assessee was not entitled to the deduction of excise duty. Since the excise duty became real and enforceable inasmuch as the goods were cleared during the relevant previous year and the show cause-cum-demand notice was also issued to the assessee during the same relevant previous year, although it may be that the assessee disputed the duty when the goods were manufactured or produced and, accordingly, moved the High Court, and the goods became non-dutiable with effect from January 5, 1981, the demand, although earlier disputed, became real and enforceable and the Tribunal was right in allowing the deduction in the previous year in question.

14. For the reasons aforesaid, we answer the reframed question in the affirmative and in favour of the assessee. There will be no order as to costs.

Shyamal Kumar Sen, J.:— I agree.